Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

or

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 1-6300

____________________________________________________

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

(Exact name of Registrant as specified in its charter)

____________________________________________________

Pennsylvania

23-6216339

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

200 South Broad Street

Philadelphia, PA

19102

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (215) 875-0700

____________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

x

Accelerated filer

o

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

Emerging growth company

o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common shares of beneficial interest, $1.00 par value per share, outstanding at April 24, 2017: 69,741,102

Except as the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” and “PREIT” refer to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this Quarterly Report on Form 10-Q to “PREIT Associates” or the “Operating Partnership” refer to PREIT Associates, L.P.

Tenant and other receivables (net of allowance for doubtful accounts of $6,552 and $6,236 at March 31, 2017 and December 31, 2016, respectively)

31,047

39,026

Intangible assets (net of accumulated amortization of $11,638 and $11,064 at March 31, 2017 and December 31, 2016, respectively)

19,172

19,746

Deferred costs and other assets, net

101,839

93,800

Assets held for sale

3,444

46,680

Total assets

$

2,590,495

$

2,616,832

LIABILITIES:

Mortgage loans payable, net

$

1,069,539

$

1,222,859

Term Loans, net

397,231

397,043

Revolving Facility

135,000

147,000

Tenants’ deposits and deferred rent

15,146

13,262

Distributions in excess of partnership investments

61,898

61,833

Fair value of derivative liabilities

834

1,520

Liabilities related to assets held for sale

—

2,658

Accrued expenses and other liabilities

62,204

68,251

Total liabilities

1,741,852

1,914,426

COMMITMENTS AND CONTINGENCIES (Note 6):

EQUITY:

Series A Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,600 shares of Series A Preferred Shares issued and outstanding at each of March 31, 2017 and December 31, 2016; liquidation preference of $115,000

46

46

Series B Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 3,450 shares of Series B Preferred Shares issued and outstanding at each of March 31, 2017 and December 31, 2016; liquidation preference of $86,250

The Company had net losses used to calculate earnings per share for all periods presented. Therefore, the effects of common share equivalents of 109 and 298 for the three months ended March 31, 2017 and 2016, respectively, are excluded from the calculation of diluted loss per share for these periods because they would be antidilutive.

See accompanying notes to the unaudited consolidated financial statements.

Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”) prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. Our unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in PREIT’s Annual Report on Form 10-K for the year ended December 31, 2016. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, the consolidated results of our operations, consolidated statements of other comprehensive income (loss), consolidated statements of equity and our consolidated statements of cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. Our portfolio currently consists of a total of 30 properties in 10 states, including 22 operating shopping malls, four other operating retail properties and four development or redevelopment properties. Two of the development and redevelopment properties are classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (redevelopment of The Gallery at Market East into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one is classified as “other.”

We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of March 31, 2017, we held an 89.4% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.

Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of March 31, 2017, the total amount that would have been distributed would have been $125.9 million, which is calculated using our March 31, 2017 closing price on the New York Stock Exchange of $15.14 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,312,676 as of March 31, 2017.

We provide management, leasing and real estate development services through two of our subsidiaries: PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PREIT Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an expanded menu of services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.

We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.

Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).

New Accounting Developments

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business. The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect that future property acquisitions will generally qualify as asset acquisitions under the standard, which permits the capitalization of acquisition costs to the underlying assets. The Company adopted this new guidance effective January 1, 2017. This new guidance is not expected to have a significant impact on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in the practice of how certain transactions are classified in the statement of cash flows, including classification guidance for distributions received from equity method investments. The standard is effective for annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The standard requires the use of the retrospective transition method. This new guidance is not expected to have a significant impact on our financial statements.

In March 2016, the FASB issued guidance intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax withholding purposes should be classified as a financing activity on the statement of cash flows. The Company adopted this guidance effective January 1, 2017. This new guidance is not expected to have a significant impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs, which were $5.1 million for the year ended December 31, 2016. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued “Revenue from Contracts with Customers.” The objective of this new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of this new standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2017 for public companies. Entities have the option of using either a full retrospective or modified approach to adopt this standard. We are currently evaluating the new guidance and have not determined the impact this standard might have on our consolidated financial statements, nor have we decided upon the method of adoption.

2. REAL ESTATE ACTIVITIES

Investments in real estate as of March 31, 2017 and December 31, 2016 were comprised of the following:

(in thousands of dollars)

As of March 31, 2017

As of December 31, 2016

Buildings, improvements and construction in progress

$

2,813,278

$

2,794,213

Land, including land held for development

506,396

505,801

Total investments in real estate

3,319,674

3,300,014

Accumulated depreciation

(1,090,174

)

(1,060,845

)

Net investments in real estate

$

2,229,500

$

2,239,169

Capitalization of Costs

The following table summarizes our capitalized salaries, commissions, benefits, real estate taxes and interest for the three months ended March 31, 2017 and 2016:

Three Months Ended March 31,

(in thousands of dollars)

2017

2016

Development/Redevelopment Activities:

Salaries and benefits

$

348

$

274

Real estate taxes

93

19

Interest

1,431

703

Leasing Activities:

Salaries, commissions and benefits

1,667

1,737

Dispositions

The following table presents our dispositions for the three months ended March 31, 2017:

Sale Date

Property and Location

Description of Real Estate Sold

Capitalization Rate

Sale Price

Gain

(in millions)

2017 Activity:

January

Beaver Valley Mall,

Monaca, Pennsylvania

Mall

15.6

%

$

24.2

$

—

Crossroads Mall,

Beckley, West Virginia

Mall

15.5

%

24.8

—

Acquisitions

In April 2017, we purchased the vacant anchor stores from Macy’s located at Valley View and Valley Malls for $2.5 million each. We have executed a lease with a replacement tenant for the Valley View Mall location. The Valley View Mall tenant is expected to open in the fourth quarter of 2017.

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2017 and December 31, 2016:

(in thousands of dollars)

As of March 31, 2017

As of December 31, 2016

ASSETS:

Investments in real estate, at cost:

Operating properties

$

637,106

$

649,960

Construction in progress

202,879

160,699

Total investments in real estate

839,985

810,659

Accumulated depreciation

(211,153

)

(207,987

)

Net investments in real estate

628,832

602,672

Cash and cash equivalents

45,721

27,643

Deferred costs and other assets, net

39,440

37,705

Total assets

713,993

668,020

LIABILITIES AND PARTNERS’ INVESTMENT:

Mortgage loans payable

443,585

445,224

Other liabilities

37,424

23,945

Total liabilities

481,009

469,169

Net investment

232,984

198,851

Partners’ share

117,755

101,045

PREIT’s share

115,229

97,806

Excess investment (1)

9,662

8,969

Net investments and advances

$

124,891

$

106,775

Investment in partnerships, at equity

$

186,789

$

168,608

Distributions in excess of partnership investments

(61,898

)

(61,833

)

Net investments and advances

$

124,891

$

106,775

_________________________

(1)

Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.”

We record distributions from our equity investments as cash from operating activities up to an amount equal to the equity in income of partnerships. Amounts in excess of our share of the income in the equity investments are treated as a return of partnership capital and recorded as cash from investing activities.

The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2017 and 2016:

Three Months Ended March 31,

(in thousands of dollars)

2017

2016

Real estate revenue

$

28,168

$

29,191

Operating expenses:

Property operating expenses

(8,704

)

(10,212

)

Interest expense

(5,372

)

(5,392

)

Depreciation and amortization

(5,855

)

(5,722

)

Total expenses

(19,931

)

(21,326

)

Net income

8,237

7,865

Less: Partners’ share

(4,491

)

(4,216

)

PREIT’s share

3,746

3,649

Amortization of and adjustments to excess investment

(10

)

234

Equity in income of partnerships

$

3,736

$

3,883

Significant Unconsolidated Subsidiary

One of our unconsolidated subsidiaries, Lehigh Valley Associates LP, the owner of the substantial majority of Lehigh Valley Mall, in which we have a 50% partnership interest, met the conditions of significant unconsolidated subsidiaries as of March 31, 2017. The financial information of this entity is included in the amounts above. Summarized balance sheet information as of March 31, 2017 and December 31, 2016 and summarized statement of operations information for the three months ended March 31, 2017 and 2016 for this entity, which is accounted for using the equity method, are as follows:

As of

(in thousands of dollars)

March 31, 2017

December 31, 2016

Summarized balance sheet information

Total assets

$

45,901

$

49,264

Mortgage loan payable

125,907

126,520

Three Months Ended March 31,

(in thousands of dollars)

2017

2016

Summarized statement of operations information

Revenue

$

8,809

$

9,048

Property operating expenses

(1,903

)

(2,226

)

Interest expense

(1,869

)

(1,906

)

Net income

4,203

4,083

PREIT’s share of equity in income

of partnership

2,102

2,042

4. FINANCING ACTIVITY

Credit Agreements

We have entered into four credit agreements (collectively, as amended, the “Credit Agreements”), as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2016: (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan. The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015 5-Year Term Loan are collectively referred to as the “Term Loans.”

As of March 31, 2017, we had borrowed $400.0 million under the Term Loans and $135.0 million under the 2013 Revolving Facility (with $15.8 million pledged as collateral for letters of credit at March 31, 2017). The carrying value of the Term Loans on our consolidated balance sheet is net of $2.8 million of unamortized debt issuance costs.

Interest expense and the deferred financing fee amortization related to the Credit Agreements for the three months ended March 31, 2017 and 2016 were as follows:

Three Months Ended March 31,

(in thousands of dollars)

2017

2016

2013 Revolving Facility

Interest expense

$

764.1

$

690.1

Deferred financing amortization

199.4

198.7

Term Loans

Interest expense

2,835.4

2,991.9

Deferred financing amortization

187.2

119.9

Each of the Credit Agreements contain certain affirmative and negative covenants, which are identical to those contained in the other Credit Agreements, and which are described in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. As of March 31, 2017, we were in compliance with all financial covenants in the Credit Agreements. Following recent property sales, the net operating income (“NOI”) from our remaining unencumbered properties is at a level such that pursuant to Unencumbered Debt Yield covenant (as described in our Annual Report on Form 10-K for the year ended December 31, 2016), the maximum unsecured amount that was available for us to borrow under the 2013 Revolving Facility as of March 31, 2017 was $242.5 million.

Amounts borrowed under the Credit Agreements bear interest at the rate specified below per annum, depending on our leverage, in excess of LIBOR, unless and until we receive an investment grade credit rating and provide notice to the administrative agent (the “Rating Date”), after which alternative rates would apply. In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is 6.50% for each property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months, and (b) 7.50% for any other property. The 2013 Revolving Facility is subject to a facility fee, which depends on leverage and is currently 0.25%, and is recorded in interest expense in the consolidated statements of operations.

The following table presents the applicable margin for each level for the Credit Agreements:

Applicable Margin

Level

Ratio of Total Liabilities to Gross Asset Value

2013 Revolving Facility

Term Loans

1

Less than 0.450 to 1.00

1.20%

1.35%

2

Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00

1.25%

1.45%

3

Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00

1.30%

(1)

1.60%

(1)

4

Equal to or greater than 0.550 to 1.00

1.55%

1.90%

(1) The rate in effect at March 31, 2017.

Mortgage Loans

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at March 31, 2017 and December 31, 2016 were as follows:

March 31, 2017

December 31, 2016

(in millions of dollars)

Carrying Value

Fair Value

Carrying Value

Fair Value

Mortgage loans(1)

$

1,069.5

$

1,039.8

$

1,222.9

$

1,189.6

(1)The carrying value of mortgage loans is net of unamortized debt issuance costs of $4.2 million and $4.5 million as of March 31, 2017 and December 31, 2016, respectively.

The mortgage loans contain various customary default provisions. As of March 31, 2017, we were not in default on any of the mortgage loans.

Mortgage Loan Activity

In March 2017, we repaid a $150.6 million mortgage loan including accrued interest secured by The Mall at Prince Georges in Hyattsville, Maryland using $110.0 million from our 2013 Revolving Facility and the balance from available working capital.

Interest Rate Risk

We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in note 7 to our unaudited consolidated financial statements.

5. CASH FLOW INFORMATION

Cash paid for interest was $13.5 million (net of capitalized interest of $1.4 million) and $17.3 million (net of capitalized interest of $0.7 million) for the three months ended March 31, 2017 and 2016, respectively.

In our statement of cash flows, we show cash flows on our revolving facility on a net basis. Aggregate borrowings on our 2013 Revolving Facility were $135.0 million and $70.0 million for the three months ended March 31, 2017 and 2016, respectively. Aggregate paydowns were $147.0 million and $20.0 million for the three months ended March 31,2017 and 2016, respectively.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of March 31, 2017, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $186.5 million, including commitments related to the redevelopment of the Fashion Outlets of Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop the Fashion Outlets of Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction which was March 14, 2016.

7. DERIVATIVES

In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.

Cash Flow Hedges of Interest Rate Risk

Our outstanding derivatives have been designated under applicable accounting authority as cash flow hedges. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in “Accumulated other comprehensive income (loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. To the extent these instruments are ineffective as cash flow hedges, changes in the fair value of these instruments are recorded in “Interest expense, net.” We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. The carrying amount of the derivative assets is reflected in “Deferred costs and other assets, net,” the amount of the associated liabilities is reflected in “Accrued expenses and other liabilities” and the amount of the net unrealized income or loss is reflected in “Accumulated other comprehensive income (loss)” in the accompanying balance sheets.

Amounts reported in “Accumulated other comprehensive income (loss)” that are related to derivatives will be reclassified to “Interest expense, net” as interest payments are made on our corresponding debt. During the next 12 months, we estimate that $1.0 million will be reclassified as an increase to interest expense in connection with derivatives. The amortization of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them

As of March 31, 2017, we had entered into 25 interest rate swap agreements with a weighted average base interest rate of 1.25% on a notional amount of $599.6 million, maturing on various dates through March 2021, and one forward starting interest rate swap agreement with a base interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and will mature in February 2021.

We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. As of March 31, 2017, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive loss as of March 31, 2017 includes a net loss of $1.4 million relating to forward starting swaps that we cash settled in prior years that are being amortized over 10 year periods commencing on the closing dates of the debt instruments that are associated with these settled swaps.

The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at March 31, 2017 and December 31, 2016. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks.

(in millions of dollars)

Notional Value

Fair Value atMarch 31, 2017 (1)

Fair Value at

December 31, 2016 (1)

Interest

Rate

Effective Date of Forward Starting Swap

Maturity Date

Interest Rate Swaps

28.1

N/A

$

—

1.38

%

January 2, 2017

48.0

$

—

(0.1

)

1.12

%

January 1, 2018

7.6

—

—

1.00

%

January 1, 2018

55.0

—

(0.1

)

1.12

%

January 1, 2018

30.0

(0.2

)

(0.3

)

1.78

%

January 2, 2019

25.0

0.3

0.3

0.70

%

January 2, 2019

20.0

(0.1

)

(0.2

)

1.78

%

January 2, 2019

20.0

(0.1

)

(0.2

)

1.78

%

January 2, 2019

20.0

(0.1

)

(0.2

)

1.79

%

January 2, 2019

20.0

(0.1

)

(0.2

)

1.79

%

January 2, 2019

20.0

(0.1

)

(0.2

)

1.79

%

January 2, 2019

25.0

0.1

0.1

1.16

%

January 2, 2019

25.0

0.1

0.1

1.16

%

January 2, 2019

25.0

0.1

0.1

1.16

%

January 2, 2019

20.0

0.1

—

1.16

%

January 2, 2019

20.0

0.3

0.2

1.23

%

June 26, 2020

20.0

0.3

0.2

1.23

%

June 26, 2020

20.0

0.3

0.2

1.23

%

June 26, 2020

20.0

0.3

0.2

1.23

%

June 26, 2020

20.0

0.3

0.2

1.24

%

June 26, 2020

9.0

0.2

0.2

1.19

%

February 1, 2021

35.0

1.0

0.9

1.01

%

March 1, 2021

35.0

1.0

0.9

1.02

%

March 1, 2021

20.0

0.6

0.5

1.01

%

March 1, 2021

20.0

0.5

0.5

1.02

%

March 1, 2021

20.0

0.5

0.5

1.02

%

March 1, 2021

Forward Starting Swap

48.0

0.7

0.7

1.42

%

January 2, 2018

February 1, 2021

$

6.0

$

4.3

_________________________

(1)

As of March 31, 2017 and December 31, 2016, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3).

The table below presents the effect of derivative financial instruments on our consolidated statements of operations and on our share of our partnerships’ statements of operations for the three months ended March 31, 2017 and 2016:

Three Months Ended March 31,

Consolidated

Statements of

Operations

Location

(in millions of dollars)

2017

2016

Derivatives in cash flow hedging relationships:

Interest rate products

Gain (loss) recognized in Other Comprehensive Income (Loss) on derivatives

$

1.0

$

(6.7

)

N/A

Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion)

$

0.8

$

1.4

Interest expense

Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)

$

—

$

(0.1

)

Interest expense

Credit-Risk-Related Contingent Features

We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of March 31, 2017, we were not in default on any of our derivative obligations.

We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.

As of March 31, 2017, the fair value of derivatives in a net liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $0.8 million. If we had breached any of the default provisions in these agreements as of March 31, 2017, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $1.0 million. We had not breached any of these provisions as of March 31, 2017.

8. EQUITY OFFERING

2017 Preferred Share Offering

In January 2017, we issued 6,900,000 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the “Series C Preferred Shares”) in a public offering at $25.00 per share. We received net proceeds from the offering of approximately $166.3 million after deducting payment of the underwriting discount of $5.4 million ($0.7875 per Series C Preferred Share) and offering expenses of $0.7 million. We used a portion of the net proceeds from this offering to repay all $117.0 million of the then-outstanding borrowings under the 2013 Revolving Facility.

We may not redeem the Series C Preferred Shares before January 27, 2022 except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement addendum designating the Series C Preferred Shares. On and after January 27, 2022, we may redeem any or all of the Series C Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, we may redeem any or all of the Series C Preferred Shares for cash within 120 days after the first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series C Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption provisions, and will remain outstanding indefinitely unless we redeem or otherwise repurchase them or they are converted.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this report.

OVERVIEW

Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.

We currently own interests in 30 retail properties in 10 states, of which 26 are operating properties, three are development properties, and one is under redevelopment. The 26 operating properties include 22 shopping malls and four other operating retail properties, have a total of 21.7 million square feet and are located in 9 states. We and partnerships in which we own an interest own 16.3 million square feet at these properties (excluding space owned by anchors).

There are 20 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 17.6 million square feet, of which we own 13.6 million square feet. The six operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.1 million square feet, of which 2.8 million square feet are owned by such partnerships.

The development and redevelopment portion of our portfolio contains four properties in two states, with two classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (redevelopment of The Gallery at Market East into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one classified as “other.”

Our primary business is owning and operating retail shopping malls, which we primarily do through our operating partnership, PREIT Associates, L.P. (“PREIT Associates”). We provide management, leasing and real estate development services through PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties in which we own interests through partnerships with third parties and properties that are owned by third parties in which we do not have an interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.

Net loss for the three months ended March 31, 2017 was $0.5 million, a decrease of $2.4 million compared to net income of $1.9 million for the three months ended March 31, 2016. This decrease was primarily due a decrease of $3.4 million in net income from properties sold in 2016 and 2017 (including related interest expense savings), a decrease of $2.0 million of gains on sales of real estate, partially offset by a $2.9 million of other interest expense decreases.

We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.

Current Economic and Industry Conditions

Conditions in the economy have caused fluctuations and variations in business and consumer confidence, retail sales, and consumer spending on retail goods. Further, traditional mall tenants, including department store anchors and smaller format retail tenants face significant challenges resulting from changing consumer expectations, the convenience of e-commerce shopping, competition from fast fashion retailers, the expansion of outlet centers, and declining mall traffic, among other factors.

In recent years, there has been an increased level of tenant bankruptcies and store closings by tenants who have been significantly impacted by these factors.

(2) Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of March 31, 2017.

(3)Includes one store that closed in April 2017

(4) Includes two stores that closed in April 2017

Vacant Anchor Replacements

In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made efforts to reduce our risks associated with certain department store concentrations. In December 2016, we acquired the Sears property at Woodland Mall and we have recaptured the Sears premises at Capital City Mall and Magnolia Mall in 2017. In April 2017, we purchased the vacant anchor boxes formerly occupied by Macy’s at our Valley View Mall and Valley Mall locations, and are in negotiations regarding the two Macy’s stores located at Moorestown Mall and Plymouth Meeting Mall.

Purchased by PREIT from tenant in the fourth quarter of 2016, under license to Sears until April 30, 2017

(5)

Purchased by PREIT in April 2017

In response to these trends, we have been changing the mix of tenants at our properties. We have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to dining, entertainment, fast fashion, off price, and large format box tenants. Some of these changes may result in the redevelopment of all or a portion of our properties. See —Capital Improvements, Redevelopment and Development Projects.

To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i) making additional borrowings under our credit facility, (ii) obtaining construction loans on specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the excess proceeds to fund capital expenditures or for debt reduction, (iv) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs, or (v) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions.

We might engage in various types of capital improvement projects at our operating properties. Such projects vary in cost and complexity, and can include building out new or existing space for individual tenants, upgrading common areas or exterior areas such as parking lots, or redeveloping the entire property, among other projects. Project costs are accumulated in “Construction in progress” on our consolidated balance sheet until the asset is placed into service, and amounted to $108.6 million as of March 31, 2017.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop the Fashion Outlets of Philadelphia. As we redevelop the Fashion Outlets of Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, NOI and depreciation, will likely be negatively affected until the newly constructed space is completed, leased and occupied.

We are also engaged in several types of development projects. However, we do not expect to make any significant investment in these projects in the short term, other than the redevelopment of the Fashion Outlets of Philadelphia.

CRITICAL ACCOUNTING POLICIES

Critical Accounting Policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including historical experience, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in similar businesses. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 2017 or 2016 except as otherwise noted, and none of these estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. We will continue to monitor the key factors underlying our estimates and judgments, but no change is currently expected.

For additional information regarding our Critical Accounting Policies, see “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

Asset Impairment

Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if management’s estimate of the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In addition, these estimates may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.

The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.

Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.

The table below sets forth certain occupancy statistics for our properties as of March 31, 2017 and 2016:

Occupancy (1) at March 31,

Consolidated

Properties

Unconsolidated

Properties(2)

Combined(2)(3)

2017

2016

2017

2016

2017

2016

Retail portfolio weighted average:

Total excluding anchors

90.4

%

90.1

%

92.4

%

95.2

%

90.8

%

91.3

%

Total including anchors

92.7

%

93.5

%

93.8

%

96.1

%

92.9

%

93.9

%

Malls weighted average:

Total excluding anchors

90.4

%

90.1

%

92.1

%

95.5

%

90.5

%

90.6

%

Total including anchors

92.7

%

93.5

%

94.6

%

96.9

%

92.9

%

93.8

%

Other retail properties

N/A

N/A

93.1

%

95.4

%

93.1

%

95.4

%

_________________________

(1)

Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. Retail portfolio and mall occupancy for all periods presented excludes properties sold or classified as held for sale in 2017 and 2016, and the Fashion Outlets of Philadelphia because the property is under redevelopment.

(2)

We own a 25% to 50% interest in each of our unconsolidated properties, and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.

(3)

Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties.

The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended March 31, 2017:

Initial Gross Rent Spread (1)

Avg Rent Spread (2)

Annualized Tenant Improvements psf (3)

Number

GLA

Term

Initial Rent psf

Previous Rent psf

$

%

%

Non Anchor

New Leases

Under 10,000 sf

62

86,591

6.3

$

56.27

N/A

N/A

N/A

N/A

$

7.93

Over 10,000 sf

5

105,869

11.0

16.95

N/A

N/A

N/A

N/A

9.07

Total New Leases

67

192,460

6.7

$

34.64

N/A

N/A

N/A

N/A

$

8.56

Renewal Leases

Under 10,000 sf

83

169,768

3.7

$

52.46

$

51.27

$

1.19

2.3%

6.0%

$

—

Over 10,000 sf

3

57,730

2.7

18.69

18.39

0.30

1.6%

2.0%

—

Total Fixed Rent

86

227,498

3.7

$

43.89

$

42.93

$

0.96

2.2%

5.6%

$

—

Percentage in Lieu

2

10,109

1.0

$

5.96

$

5.96

N/A

N/A

N/A

$

—

Total Renewal Leases

88

237,607

3.6

$

42.28

$

41.36

$

0.92

2.2%

5.6%

$

—

Total Non Anchor(4)

155

430,067

4.9

$

38.86

Anchor

New Leases

3

206,878

12.0

$

9.36

N/A

N/A

N/A

N/A

$

5.25

Renewal Leases

1

212,000

5.0

$

1.37

$

1.41

$

(0.04

)

(2.8)%

N/A

Total

4

418,878

10.3

$

5.32

_________________________

(1)

Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.

(2)

Average renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.

(3)

These leasing costs are presented as annualized costs per square foot and are amortized uniformly over the initial lease term.

(4)

Includes 11 leases and 248,915 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.

Net loss for the three months ended March 31, 2017 was $0.5 million, a decrease of $2.4 million compared to net income of $1.9 million for the three months ended March 31, 2016. This decrease was primarily due a decrease of $3.4 million in net income from properties sold in 2016 and 2017 (including related interest expense savings), a decrease of $2.0 million of gains on sales of real estate, partially offset by a $2.9 million of other interest expense decreases.

The following table sets forth our results of operations for the three months ended March 31, 2017 and 2016.

Three Months Ended March 31,

% Change2016 to2017

(in thousands of dollars)

2017

2016

Real estate revenue

$

88,424

$

101,456

(13

)%

Property operating expenses

(36,980

)

(43,111

)

(14

)%

Other income

840

516

63

%

Depreciation and amortization

(31,758

)

(33,735

)

(6

)%

General and administrative expenses

(9,041

)

(8,586

)

5

%

Provision for employee separation expense

—

(535

)

(100

)%

Project costs and other expenses

(312

)

(51

)

512

%

Interest expense, net

(15,338

)

(19,346

)

(21

)%

Impairment of assets

—

(606

)

(100

)%

Equity in income of partnerships

3,736

3,883

(4

)%

(Loss) gains on sales of interests in real estate, net

(57

)

2,035

(103

)%

Gain on sales of interests in non operating real estate

—

9

(100

)%

Net income (loss)

$

(486

)

$

1,929

(125

)%

The amounts in the preceding tables reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented under the equity method of accounting in the line item “Equity in income of partnerships.”

Real Estate Revenue

Real estate revenue decreased by $13.0 million, or 13%, in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily due to:

•

a decrease of $12.4 million in real estate revenue related to properties sold in 2016 and 2017;

•

a decrease of $0.5 million in same store common area expense reimbursements, due to a decrease in common area expense (see “—Property Operating Expenses”), as well as lower occupancy at some properties and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements;

•

a decrease of $0.2 million in same store seasonal photo income due to a temporary timing difference resulting from the Easter holiday occurring in March 2016 in the prior period compared to April 2017 in the current period; partially offset by

•

an increase of $0.3 million in same store lease termination revenue.

Property Operating Expenses

Property operating expenses decreased by $6.1 million or 14% in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily due to:

•

a decrease of $5.7 million in property operating expenses related to properties sold in 2016 and 2017;

•

a decrease of $0.6 million in same store common area maintenance expense, including a $0.7 million decrease in

a decrease of $0.3 million in same store bad debt expense, primarily due to bad debt expense recorded in connection with the Pac Sun bankruptcy during the three months ended March 31, 2016; and

•

a decrease of $0.2 million in same store marketing expense, offset by a corresponding decrease of $0.2 million in Same Store marketing revenue; partially offset by

•

an increase of $0.7 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment value and the real estate tax rate.

Depreciation and Amortization

Depreciation and amortization expense decreased by $2.0 million, or 6%, in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily due to properties sold in 2016 and 2017.

General and administrative expenses

General and administrative expenses increased by $0.5 million, or 5% primarily due to increases in personnel costs, partially offset by an increase in capitalized salaries.

Interest Expense

Interest expense decreased by $4.0 million, or 21%, in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This decrease was primarily due to lower weighted average interest rates and average debt balances. Our weighted average effective borrowing rate was 4.06% for the three months ended March 31, 2017 compared to 4.33% for the three months ended March 31, 2016. Our weighted average debt balance was reduced by $185.3 million to $1,651.6 million for the three months ended March 31, 2017, compared to $1,836.9 million for the three months ended March 31, 2016 due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance, net of capital expenditures related to anchor replacements and redevelopment spending.

NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES

Overview

The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles, or GAAP, for the periods presented. We also use Net Operating Income (NOI) and Funds from Operations (FFO) which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:

•

We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (Same Store NOI) and non-same store (Non Same Store NOI) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold or under redevelopment during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below.

•

We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. In addition to FFO and FFO per diluted share and OP Unit, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted to show the effect of items such as provision for employee separation expense and loss on hedge ineffectiveness.

NOI and FFO are commonly used non-GAAP financial measures of operating performance in the real estate industry, and we use them as supplemental non-GAAP measures to compare our performance between different periods and to compare our performance to that

of our industry peers. Our computation of NOI, FFO and other non-GAAP financial measures, such as Same Store NOI, Non Same Store NOI, NOI attributable to our share of unconsolidated properties, and FFO, as adjusted, may not be comparable to other similarly titled measures used by our industry peers. None of these measures are measures of performance in accordance with GAAP, and they have limitations as analytical tools. They should not be considered as alternative measures of our net income, operating performance, cash flow or liquidity. They are not indicative of funds available for our cash needs, including our ability to make cash distributions. Please see below for a discussion of these non-GAAP measures and their respective reconciliation to the most directly comparable GAAP measure.

Unconsolidated Properties and Proportionate Financial Information

The non-GAAP financial measures presented below incorporate financial information attributable to our share of unconsolidated properties. This proportionate financial information is non-GAAP financial information, but we believe that it is helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP using the equity method of accounting. Under such method, earnings from these unconsolidated partnerships are recorded in our statements of operations prepared in accordance with GAAP under the caption entitled “Equity in income of partnerships.”

To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.

We have determined that we hold a noncontrolling interest in each of our unconsolidated partnerships, and account for such partnerships using the equity method of accounting, because:

•

Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all decisions in the ordinary course of business are made jointly.

•

The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.

•

All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of all partners.

•

Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner.

We hold legal title to a property owned by one of our unconsolidated partnerships through a tenancy in common arrangement. For this property, such legal title is held by us and another entity, and each has an undivided interest in title to the property. With respect this property, under the applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting. The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”